Taxman clamping down on Inheritance Tax!

Revenue & Customs made an extra £70m in Inheritance Tax last year querying property valuations. Don't get caught out!

Over the last year, HM Revenue & Customs launched 9,368 separate investigations into Inheritance Tax valuations. This basically means that they queried the valuations of properties which were included in the estates of the deceased.

And these investigations proved pretty lucrative – they raised an additional £70m in tax, the equivalent of around £24,600 per case in those instances where additional tax was found to be payable.

So how does the taxman go about these valuations?

Valuing a property

Inheritance Tax is charged when you leave an estate worth in excess of £325,000 (or £650,000 for couples). With house prices having grown so exponentially over the past decade, it’s the value of the property left behind after you die that is in many cases the deciding factor as to whether you will need to stump up the 40% in Inheritance Tax.

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The idea is that the taxman wants to see that you have taken ‘reasonable care’ to get an accurate valuation. Additional questions to ensure that due care has been taken may also be asked, covering whether the valuer’s attention was drawn to particular features of the property (such as development potential) or whether anything unusual about the valuation was questioned.

And failing to take ‘reasonable care’ can be costly – HMRC can fine the estate and its beneficiaries up to 100% of the additional tax liability, on top of the additional tax due.

So for undervaluing a property by £20,000, you could end up forking out £16,000 in due tax and fines.

Clearly being vigilant about the property’s value is important, but there are things you can do well in advance of death to ensure that your Inheritance Tax bill is as small as possible.

Leave it to charity

In the Budget earlier this year, the Government announced a reduced rate of Inheritance Tax for those people who leave 10% of their estate to charity.

So instead of handing over 40% in tax, you’ll only have to pay 36%. In reality, this won’t leave your loved ones any better off, as the money will simply be going to charitable causes rather than the taxman. But if you trust that charity to use your cash a little more wisely than the Treasury, then it might be worth considering.

Life insurance

When you take out a life insurance policy, the idea is that your family benefit from the entire payout. They can then use that money to pay off the mortgage, pay for the kids’ university costs, just generally use that money to cover for the missing salary once you’re gone.

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There is a way round this, and that is to have your policy written into trust. That way your policy is treated as being separate from the rest of your estate, meaning the cash is paid quicker, and will not be taxed.

For more on this, be sure to have a read of Save your family thousands in taxes.

Get gifting

The taxman allows us all a number of gift limits which we can make each year, without having to pay any Inheritance Tax on them.

So, for example, all of us can give away £3,000 in financial gifts. And if you don’t use up your full allocation this year, next year you can give away £6,000.

On top of that general allocation, there are a number of more specific gift allowances. So parents can give their children £5,000 each as wedding gifts, while grandparents can hand over £2,500 and general friends can make a gift of £1,000.

You can also give regular gifts out of your salary, so long as they do not inhibit your current lifestyle. So for example, regular payments to someone and regular gifts for birthdays or anniversaries are exempt.

Exempt beneficiaries

Who you hand your cash over to can also make a difference as to whether or not it should be subject to Inheritance Tax.

If you gift money over to any of the following, whether in life or in your will, the gifts will be exempt of tax.

• Your spouse or civil partner, so long as they have a permanent home in the UK.
• A qualifying charity.
• Certain national institutions, such as museums, universities and the National Trust.
• Any UK political party that has at least two elected members of the House of Commons, or one member but the party received at least 150,000 votes.

The seven-year rule

Perhaps the most important rule of all, which overrides all of the above, is that any gift you make to an individual is exempt from Inheritance Tax, so long as you live for another seven years after making the gift. These are known as ‘potentially exempt’ transfers.

However, should you give away an asset but retain an interest in it – for example, you give your house to your children, but continue to live there – this gift will not be potentially exempt.

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